Franchising’s Hidden Costs

Rob White’s astonishment in today’s Telegraph at the £300 million taxpayer bailout of train drivers’ “gold-plated” pensions during the 1994 rail privatisation is a stark reminder that the financial intricacies of restructuring transport industries are rarely as simple as they seem. As rail franchises gradually return to public control and bus networks, most notably in Greater Manchester, shift toward franchising under local authorities like Transport for Greater Manchester (TfGM), the narrative of “taking back control” dominates headlines. Yet, beneath the surface lies a tangle of under-reported costs—pensions chief among them—that deserve far greater scrutiny from industry insiders and the public alike. While the move toward effective nationalisation is a bold and, in many ways post-Covid, necessary step, we must confront the uncomfortable truth: this transformation comes at a significant, often obscured, price.

Rail

The slow unwinding of the 1990s privatisation experiment has seen franchises like TransPennine Express, Northern and Southeastern fall into the hands of the Department for Transport’s Operator of Last Resort (OLR) since 2018, with others likely to follow as contracts expire or performance falters. The rationale is clear: a fragmented, profit-driven system has delivered unreliable services, soaring fares and a £13.3 billion government subsidy in 2021-22 alone—nearly double pre-Covid levels. But bringing these operations in-house isn’t a straightforward transfer of assets. Pensions, in particular, are a financial landmine. When rail was privatised, the government guaranteed defined-benefit pension schemes for workers, transferring liabilities to private operators. Now, as franchises revert to public ownership, the state is reabsorbing these obligations. The £300 million pension bailout White references is a relic of that era, but similar liabilities persist. The Railways Pension Scheme, covering thousands of workers, is a complex beast, with deficits that could balloon if investment returns falter or life expectancy rises. Government data on these costs are sparse, but the Office of Rail and Road’s 2021 financial report hints at ongoing pension pressures, with operators’ contributions to schemes eating into already tight budgets.

Buses

The bus sector tells a parallel story, albeit on a smaller scale. Greater Manchester’s Bee Network, spearheaded by Mayor Andy Burnham, is the UK’s most ambitious attempt to re-municipalise bus services since deregulation in 1986. From January this year, TfGM brought all bus services under local control, awarding franchises to operators like Go North West, Metroline and Diamond while acquiring depots and fleets from firms like Stagecoach and First. This shift promises integrated fares, consistent branding and a 5% passenger increase already recorded in early phases. But what of the hidden costs? Acquiring private bus companies isn’t just about buying buses and depots; it’s about inheriting their financial baggage, too. Pensions, again, are a key concern. Many bus workers are enrolled in defined-benefit or hybrid schemes, remnants of the pre-deregulation National Bus Company era. When TfGM acquires a company, it must either absorb these liabilities or negotiate their transfer, potentially at significant cost. TfGM’s 2024/25 budget of £332.5 million includes £78.4 million for borrowing costs, but specific pension liabilities remain undisclosed. Freedom of Information requests to TfGM have yielded little clarity, suggesting either a lack of transparency or, more charitably, a complex picture still being unravelled.

Not Just Pensions

Beyond pensions, other under-reported costs lurk. Redundancy payments for staff not retained during franchise transitions, legal fees from operator challenges (Stagecoach’s failed judicial review of TfGM’s franchising plans springs to mind), and the cost of upgrading ageing fleets to meet net-zero targets all add to the bill. For buses, TfGM’s £22.7 million investment in 50 electric double-deckers is a drop in the ocean compared to the hundreds of vehicles needing replacement across Greater Manchester. Rail faces similar hurdles: the OLR’s takeover of Northern in 2020 required immediate investment in rolling stock and stations, with costs absorbed by taxpayers. Then there’s the issue of “stranded assets”—depots or infrastructure no longer needed under new operating models, which may require write-offs or costly repurposing.

These financial burdens are not unique to the UK. International examples, like Germany’s partial re-nationalisation of rail, show similar challenges, with pension liabilities and infrastructure upgrades often dwarfing initial estimates. Yet, the lack of granular data from the Department for Transport or TfGM makes it hard to quantify the full extent of these costs. This opacity fuels scepticism, as taxpayers—already footing 44% of bus industry income and nearly all rail subsidies—are left in the dark about the long-term price of reform.

The Covid Effect

Despite these challenges, the case for bringing transport in-house remains compelling. Privatisation’s failures—skyrocketing bus fares (up 403% since 1987), plummeting ridership (down 38% outside London) and rail’s cancellations crisis—are well-documented. More pertinent is the decision by the government during 2020 and much of 2021 to criminalise non-essential use of public transport in response to the Covid pandemic. Criminalise. In 2021. Once such draconian legislation is introduced, it is impossible to simply expect matters to resume once the crisis ends. In my opinion, nationalisation in specific areas is needed to ‘right’ the Conservative government’s ‘wrong’.

Public control offers a chance to prioritise passengers over profits, integrate services (as TfGM’s Bee Network does with trams and buses) and attempt to get patronage back to something that resembles 2019, with simpler fares and rising patronage, is a blueprint for what’s possible, at least in theory in a densely-populated urban area. Rail nationalisation, as Labour’s has championed, could streamline operations and curb fare hikes, delivering a system that serves communities, not shareholders.

But we must not shy away from the costs. The effective nationalisation of buses and rail is not a free lunch. Pensions, redundancies, legal battles and fleet upgrades represent a multi-billion-pound commitment, much of it hidden from public view. While the Telegraph may sensationalise “gold-plated” pensions, the reality is more mundane: these are contractual obligations, inherited from decades of policy missteps. The industry, and its readership, must demand greater transparency from government and local authorities like TfGM. Only then can we weigh the true price of reform against its undeniable benefits. For now, the move toward public ownership is a bold step toward a fairer, greener transport system—but it’s a step we’re taking with our eyes half-closed, unaware of the full cost beneath our feet.